Adding a purchase price contingency to the LOI...ideas?

[Marc C.]

Lately, we've been marketing directly to "mom and pop" owners who want to retire. Their books are usually more or less useless in a lot of ways: No management fee, no labor charges on repairs (they do their own), things that should be capex are listed as expenses, etc. What I ended up doing recently is just building my own APOD and including that with my LOI. It shows the expense ratio very clearly. In my LOI, I said, "The purchase price is subject to the property's actual expenses being no more than 40% of the property's actual rents."

I've toyed with making it about the tax returns: "The purchase price is based on our own estimates of the property's income and expenses and are subject to verification with the property's tax returns: We will pay the lowest of either the purchase price or 15 times the net income shown on the property's tax returns (not including amortization, depreciation, and loan payments.)" [i.e., a 7% cap rate]

One could also make it about the property's gross income: "The purchase price is based on our own estimates of the property's rents, but are subject to verification using the property's bank accounts: We agree to pay the highest of either the purchase price or 7 times the net rents which were deposited in the property's bank account in the past 12 mos." This one would be the easiest for the seller to understand. 

All 3 options are a little convoluted, but pointing out this contingency allows one to make an offer that is most attractive to the seller (say, near their asking price), but makes sure they understand it's all about the REAL numbers that they are going to have to share with us in the near future.

Curious if anyone else has tried this, or something similar, with their LOIs. 

[JD Martin]

I think it's too specific. If you want a financial out just word it as such, i.e. "Offer is contingent upon satisfactory verification of income and expenses by buyer, seller to provide in such acceptable form within X days", or something similar. If you've done your own homework, and you're buying at a great price, it's not going to matter all that much what the seller provides, and if you're buying at a terrible price, my question would be: why?

To be totally honest: I have never accepted any numbers provided by the seller. By the time we've reached contract, I already know to a reasonably strong level what my rehab/maintenance costs are going to be and what the potential market is for that unit. From my point of view, I couldn't care less if he/she rented the units for $1 or $10,000.